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December 28, 2012

MSC Opinion: A mortgage acquired through voluntary purchase agreement with FDIC must be recorded before foreclosure by advertisement

In Kim v. JPMorgan Chase Bank, NA, the Michigan Supreme Court held that, where a mortgagee engages in a voluntary purchase agreement with the Federal Deposit Insurance Corporation ('FDIC'), it must comply with MCL 600.3204 and record the assignment of the mortgage before foreclosing by advertisement. The court further held that failure to do so renders the foreclosure sale voidable, as opposed to void ab initio.

The Kims granted Washington Mutual Bank a mortgage interest in their home. After the Office of Thrift Management closed Washington Mutual, the FDIC acquired the mortgage. Chase later acquired the mortgage from the FDIC, along with all of Washington Mutual's assets. The Kims defaulted on the loan and Chase foreclosed by advertisement. The Kims challenged the foreclosure because Chase did not comply with MCL 600.3204's foreclosure-by advertisement requirement that a mortgage interest be recorded. The Circuit Court granted summary judgment to Chase, holding that it was not required to record the assignment because it had acquired the Kims' mortgage by operation of law, rendering MCL 600.3204 inapplicable. The Court of Appeals reversed, holding that Chase had acquired the loan by assignment, and had to record before foreclosing by advertisement. The Court of Appeals further held the failure to record rendered the sheriff's sale void ab initio.

Justices Marilyn Kelly, joined by Justices Cavanagh, Markman, and Hathaway affirmed in part and reversed in part. The majority held that, although the FDIC acquired the mortgage by operation of law, Chase acquired it by voluntary assignment. Thus, MCL 600.3204(3) applies, and requires the creation of a record chain of title evidencing the assignment before foreclosure can take place by advertisement. The majority further reasoned that the party seeking to set aside a foreclosure based on such a defect must demonstrate prejudice by showing it could have better preserved its interest if the other party complied. Therefore, the majority concluded a failure to record renders a foreclosure sale voidable.

Justice Zahara dissented and was joined by Justices Young and Mary Beth Kelly. He would have held that the transfer from the FDIC to Chase also occurred by operation of law and not by assignment. The dissent reasoned that 12 USC 1821(d)(2)(G)(i)(II) empowers the FDIC to resolve the business of a failed bank, and the FDIC transferred Washington Mutual's assets and liabilities to Chase pursuant to that statutory authority. Thus, according to the dissent, the FDIC made the transaction by operation of law.

Justice Markman concurred with the majority, writing separately to emphasize that the dissent failed to provide a workable definition of the term 'operation of law.'

Disclaimer: Warner Norcross & Judd LLP filed an amicus curiae brief on behalf of the Michigan Bankers Association arguing that the foreclosure sale was voidable, not void ab initio.

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